The British government needs to remove the bias towards debt finance and make the corporate tax regime neutral if a culture of responsible capitalism is to develop.

That’s according to lobby group the Institute for Family Business, which said the current tax system is undermining the efforts of family businesses in the UK to plan for the future and finance growth.

In a letter to the chancellor, George Osborne, ahead of this month’s Budget, the IFB called on the government to ensure family business aren’t penalised by current tax rules.

The “Treasury’s bias towards debt finance” means that family businesses that are funded by retained earnings end up with “a higher cost of capital than companies that rely on debt finance”, the organisation said.

As well as creating a neutral tax regime, the IFB wants the UK government to improve access to non-banking finance through the development of a bond market focused on the needs of mid-sized businesses.

It also called for changes to the business asset holdover relief rule in order to make transfer of ownership to the next generation easier.

“Without the modifications we’re looking for, we don’t think family businesses have a level playing field to grow and compete with other companies, leaving some making decisions based on tax rather than commercial reasons,” a spokesman for the IFB told CampdenFB.

The London-based group wants a single qualifying test for BAHR and business property relief, both of which it says protect family firms from having to sell a business to pay an inheritance or capital gains tax bill.

While the reliefs are important for ensuring businesses continue, the tests to qualify often create confusion and problems for family businesses, said the IFB. “The different tests for BAHR and BPR restrict the use of the other, reducing their benefit to family businesses.”

In a statement, IFB director general Grant Gordon said the government needs to ensure the “entrepreneurial spirit” of family businesses is allowed to thrive.

“The government says it wants to see a more responsible form of capitalism.

“We believe family businesses do just that by promoting active stewardship of their companies through the responsible management of their resources over the short, medium and long-term, but there are discrepancies in the current tax system that if addressed would enable family firms to grow faster,” he added.

Two-thirds of private sector enterprises in the UK are family firms, providing 9.2 million jobs, according to figures from the IFB.